Understanding how income tax works for salaried individuals is essential for effective financial planning. With the implementation of new tax slabs under the Finance Act 2022, a number of changes have taken place that directly affect employees across various income groups. For the fiscal year 2022-23, the government has introduced a revised structure that alters the way taxes are calculated, introduces relief in certain categories, and increases the burden on higher income earners. This section provides an in-depth explanation of the revised tax regime, its impact on salaried individuals, and how the restructuring of slabs reflects broader economic and fiscal policies.
Overview of the Tax System for Salaried Individuals
Taxation for salaried individuals is based on annual taxable income, which is calculated after deducting exempt allowances and applicable reliefs. The government relies heavily on income tax as a major source of revenue, and the salaried class has historically been one of the most compliant segments of taxpayers. With over 1.2 million salaried individuals filing returns in tax year 2021, their contribution forms a significant portion of direct tax revenue.
The Finance Act 2022 introduced several changes with the objective of rationalizing tax slabs. While the reform provides relief to individuals earning up to Rs. 2.4 million annually, it increases the burden on those in higher salary brackets. This restructuring is meant to create a progressive taxation system where higher earners contribute a larger share to government revenue.
Revised Tax Slabs for 2022-23
The newly approved slabs introduce both relief and additional tax liabilities depending on the income category. The slabs are designed to align monthly salaries with progressive annual taxation. The revised structure is as follows:
- Annual income up to Rs. 600,000 is exempt from tax.
- Annual income between Rs. 600,001 and Rs. 1,200,000 is taxed at 2.5 percent of the amount exceeding Rs. 600,000.
- Annual income between Rs. 1,200,001 and Rs. 2,400,000 is taxed at Rs. 15,000 plus 12.5 percent of the amount exceeding Rs. 1,200,000.
- Annual income between Rs. 2,400,001 and Rs. 3,600,000 is taxed at Rs. 165,000 plus 20 percent of the amount exceeding Rs. 2,400,000.
- Annual income between Rs. 3,600,001 and Rs. 6,000,000 is taxed at Rs. 405,000 plus 25 percent of the amount exceeding Rs. 3,600,000.
- Annual income between Rs. 6,000,001 and Rs. 12,000,000 is taxed at Rs. 1,005,000 plus 32.5 percent of the amount exceeding Rs. 6,000,000.
- Annual income exceeding Rs. 12,000,000 is taxed at Rs. 2,955,000 plus 35 percent of the amount exceeding Rs. 12,000,000.
These slabs mark a significant shift from the previous year, with the minimum rate now set at 2.5 percent for those earning above Rs. 600,000 annually, while the maximum has been increased to 35 percent for very high-income earners.
Comparison with Previous Tax Structure
Before the Finance Act 2022, the tax system followed a different slab-based calculation. For many middle-income earners, the previous slabs resulted in higher annual liabilities. The new slabs bring some degree of relief, particularly to those with salaries up to Rs. 2.4 million annually.
For example:
- An employee earning Rs. 1,200,000 annually previously paid Rs. 30,000 in tax, but under the revised structure, this has been reduced to Rs. 15,000.
- An employee with Rs. 2,400,000 annual income saw a reduction from Rs. 180,000 to Rs. 165,000.
- On the other hand, those earning Rs. 6,000,000 annually faced an increase in liability from Rs. 895,000 to Rs. 1,005,000.
- Similarly, salaries in excess of Rs. 12,000,000 attract much higher tax liability, increasing from Rs. 2,345,000 to Rs. 2,955,000.
The comparison highlights a redistribution where low- and middle-income individuals benefit, while higher-income groups experience increased taxation.
Case Study: Salaried Individuals Across Different Brackets
To understand the real impact of these changes, it is useful to analyze specific scenarios.
Employee earning Rs. 100,000 per month
Annual taxable income: Rs. 1,200,000
Tax liability under previous structure: Rs. 30,000
Tax liability under revised structure: Rs. 15,000
Impact: Reduction of Rs. 15,000 annually.
Employee earning Rs. 200,000 per month
Annual taxable income: Rs. 2,400,000
Tax liability under previous structure: Rs. 180,000
Tax liability under revised structure: Rs. 165,000
Impact: Reduction of Rs. 15,000 annually.
Employee earning Rs. 500,000 per month
Annual taxable income: Rs. 6,000,000
Tax liability under previous structure: Rs. 895,000
Tax liability under revised structure: Rs. 1,005,000
Impact: Increase of Rs. 110,000 annually.
Employee earning Rs. 1,000,000 per month
Annual taxable income: Rs. 12,000,000
Tax liability under previous structure: Rs. 2,345,000
Tax liability under revised structure: Rs. 2,955,000
Impact: Increase of Rs. 610,000 annually.
This illustrates the clear policy direction of providing relief to low and mid-income earners while requiring higher contributions from those with significantly larger salaries.
The Concept of Rationalization of Tax Slabs
The term rationalization refers to restructuring the slabs in a way that aligns taxation with affordability and fairness. For individuals earning below Rs. 250,000 monthly, the revisions offer noticeable benefits. This not only provides relief to the middle class but also encourages continued tax compliance among the majority of salaried taxpayers.
By contrast, the increase in tax rates for high-income brackets reflects the government’s attempt to collect more revenue from those most capable of contributing. This progressive structure ensures that the tax system remains equitable.
Broader Impact on Salaried Individuals
The impact of the revised system can be categorized as follows:
Relief for Middle-Income Earners
Individuals earning up to Rs. 2.4 million annually have benefited from reduced tax liabilities. For example, those earning Rs. 100,000 monthly now pay half the tax compared to the previous system. This provides much-needed financial space amid rising inflation and living costs.
Increased Burden on High-Income Earners
Those earning above Rs. 3.6 million annually are now subject to higher taxes. The steep rise in liability for individuals earning more than Rs. 12 million annually reflects a shift in government policy to increase revenue from wealthier citizens.
Encouragement of Voluntary Compliance
By offering relief to the majority of middle-income salaried taxpayers, the government aims to build trust and encourage voluntary compliance. Salaried individuals, being the most documented segment of the population, often cannot avoid taxation, but rationalized rates make the burden more acceptable.
Statistical Context
In tax year 2021, about 1.2 million salaried individuals filed returns. Out of these, nearly 333,000 earned Rs. 50,000 monthly, a group that remains exempt. This exemption continues to protect low-income households from additional financial pressure.
However, the introduction of a minimum tax rate of 2.5 percent for incomes above Rs. 600,000 ensures that individuals with some earning capacity contribute to state revenue. This expands the tax net without disproportionately affecting low earners.
Key Takeaways from the Revised System
- Salaried individuals earning up to Rs. 2.4 million annually gain from reduced tax liabilities.
- Those in higher brackets, particularly above Rs. 6 million annually, face increased taxes.
- Rationalization supports fairness and encourages compliance.
- The restructuring aims to balance revenue needs with relief for the middle class.
- With progressive rates, the government seeks to increase collections from high-income earners without burdening the majority of taxpayers.
Impact of Revised Tax Slabs and Withdrawn Allowances on Salaried Individuals
The Finance Act 2022 brought notable changes to the income tax structure for salaried individuals in the fiscal year 2022-23. While rationalization of tax slabs provided relief to a section of employees, the government also withdrew certain long-standing tax credits and allowances that were previously available.
These measures have generated a mix of relief and concern, as the implications vary significantly across income brackets. This section examines the dual nature of these reforms, their impact on salaried taxpayers, and the wider fiscal and economic consequences.
The Dual Nature of Tax Reforms
Tax reforms introduced under the Finance Act 2022 can be divided into two categories:
- Rationalization of tax slabs, which resulted in reduced liabilities for low- and middle-income earners.
- Withdrawal of specific tax credits and allowances, which increased the effective tax burden for certain individuals.
By studying both dimensions together, we can gain a comprehensive understanding of how the reforms affect different sections of the salaried class.
Rationalization of Tax Slabs
The restructuring of slabs was the most widely discussed change. Salaried individuals earning up to Rs. 2.4 million annually benefited from reduced tax liabilities. For instance, someone earning Rs. 100,000 monthly saw their tax burden halved from Rs. 30,000 annually to Rs. 15,000.
This rationalization aimed to provide relief to a majority of taxpayers, especially in an environment of rising inflation and cost of living. However, the flip side is that high-income earners experienced increased liability. Salaries exceeding Rs. 12 million annually were subjected to the maximum rate of 35 percent, resulting in a significant rise in payable tax.
Withdrawal of Tax Credits and Allowances
While rationalization was welcomed by many, the government also withdrew some important credits and allowances from tax year 2023 onward. These included:
- Section 60C: Profit on debt incurred on house financing
- Section 62: Investment in new shares of listed companies, mutual funds, Sukuks, and life insurance policies
- Section 62A: Purchase of health insurance policies
These provisions had previously enabled salaried individuals to reduce taxable income by investing in specific financial products or incurring certain expenses. Their withdrawal narrows the avenues for tax planning, making overall liabilities heavier for some taxpayers.
Impact on Middle-Income Salaried Individuals
Loss of House Financing Tax Credit
One of the most significant removals is the credit for profit on debt for house financing. Middle-class households often rely on mortgage financing to purchase homes, and the ability to claim tax credits helped reduce the cost burden. With the withdrawal of this allowance, salaried individuals financing property through bank loans now face higher net costs.
Removal of Health Insurance Relief
The withdrawal of relief on health insurance policies also impacts the middle-income group. Many individuals used this provision to reduce their taxable income while securing health coverage. Without the credit, the incentive to purchase insurance reduces, possibly discouraging financial protection in the healthcare sector.
Limited Avenues for Investment Credits
Previously, investments in IPOs, mutual funds, and life insurance policies offered both financial growth and tax savings. Their withdrawal restricts salaried individuals from claiming relief while making such investments. This not only impacts personal financial planning but may also reduce inflows into capital markets and insurance sectors.
Impact on High-Income Salaried Individuals
High-income earners face a two-fold impact: increased tax rates under the new slabs and withdrawal of credits.
Higher Marginal Tax Rates
Salaried individuals earning more than Rs. 3.6 million annually are subject to significantly higher marginal rates. For example, someone earning Rs. 12 million annually now pays Rs. 2,955,000 in tax compared to Rs. 2,345,000 previously. This increase, coupled with the withdrawal of tax-saving instruments, means high-income professionals bear a much heavier burden.
Limited Planning Options
With the removal of several credits, tax planning flexibility has been reduced. High-income earners often made use of investment-related credits to optimize tax liabilities. Their absence leaves fewer opportunities to mitigate the higher rates they are now subject to.
Government Rationale Behind Withdrawals
The government’s rationale for withdrawing tax credits and allowances revolves around a few key objectives:
- Broadening the Tax Base
By reducing exemptions, the government ensures that more individuals contribute taxes without relying on credits. - Simplifying the Tax System
Multiple credits and allowances often complicate tax filing and administration. Removing them simplifies compliance. - Increasing Direct Tax Revenue
Pakistan has historically struggled with low tax-to-GDP ratios. Withdrawing credits increases collections, particularly from documented salaried individuals. - Promoting Progressive Taxation
Relief has been shifted to low- and middle-income earners, while high earners face higher burdens, aligning with principles of progressivity.
Repercussions for Economic Behavior
The withdrawal of credits does not only impact individuals directly; it also influences broader economic behavior.
Housing Sector
The removal of house financing credits could slow down mortgage uptake. With home loans becoming less attractive from a tax perspective, demand in the housing sector may see some decline.
Insurance Sector
The loss of tax benefits on life and health insurance policies reduces incentives for salaried individuals to invest in coverage. This could impact penetration rates in a sector already struggling to expand in the country.
Capital Market Participation
By eliminating credits on investments in shares and mutual funds, the government may inadvertently reduce participation in capital markets. This could hinder capital mobilization for companies and slow the development of financial markets.
Continued Availability of Certain Tax Credits
Despite the withdrawal of several provisions, not all avenues for tax savings have been eliminated. Some key credits and allowances still exist for salaried individuals:
- Investment in Voluntary Pension Schemes (VPS)
- Donations or zakat to approved charitable organizations
- Allowance for educational expenses of children, available if annual taxable income is up to Rs. 1.5 million
These provisions, although limited, provide some relief and planning opportunities.
The Burden of Advance Taxes
Another aspect affecting salaried individuals is the collection of advance taxes at different points. These include:
- Advance tax on telephone, internet, and mobile bills
- Advance tax on international credit card transactions
- Advance tax collected on electricity bills exceeding Rs. 25,000 for non-filers
- Advance tax on purchase and sale of immovable property
- Advance tax on purchase of vehicles
- Additional advance taxes on dividends, savings accounts, and winnings for non-filers
While advance taxes are adjustable against final liability, they can strain monthly cash flows for salaried individuals, particularly when combined with the loss of tax-saving credits.
Redistribution of Tax Burden
The overall effect of the Finance Act 2022 is a redistribution of tax burden across income groups.
- Low- and middle-income earners see reductions due to rationalized slabs, though some lose relief through withdrawn credits.
- High-income earners face both higher slab rates and fewer opportunities to reduce liability, resulting in heavier overall taxation.
- The removal of credits on essential expenditures like housing and health affects financial security for the middle class.
Policy Analysis
From a policy perspective, the reforms reflect a balancing act between equity and revenue needs. Relief for the middle-income segment was necessary in light of inflation and stagnant wages. At the same time, increasing contributions from wealthier citizens helps bridge fiscal gaps. However, the removal of credits for socially beneficial expenses such as housing and health may have unintended negative consequences, undermining broader economic and social objectives.
Future of Taxation for Salaried Individuals
The recent changes enacted through the Finance Act 2022 have already redefined the tax landscape for salaried individuals. While the rationalization of slabs has provided targeted relief, the withdrawal of certain tax credits and allowances has shifted the overall environment toward higher compliance and limited tax planning opportunities.
Looking ahead, the future of taxation for salaried individuals depends on broader fiscal strategies, economic priorities, and the government’s approach to balancing equity with revenue generation. This section explores the potential trajectory of taxation, challenges in implementation, and how these policies may evolve over the coming years.
Evolving Structure of Tax Slabs
Tax slabs are the foundation of any personal income tax system. Over time, governments adjust these slabs to reflect inflation, living standards, and revenue requirements. The revisions under the Finance Act 2022 show a deliberate attempt to provide relief to lower- and middle-income groups while placing greater responsibility on higher earners.
Inflation and Tax Bracket Adjustments
As inflation continues to rise, the purchasing power of salaried individuals declines. If tax brackets are not adjusted regularly, even modest salary increases can push individuals into higher slabs, creating what is known as “bracket creep.” Policymakers must therefore consider periodic revisions of tax slabs to prevent overburdening salaried individuals.
Gradual Increase in Progressivity
The recent increase in marginal tax rates for high-income earners suggests a shift toward more progressive taxation. This trend may continue in the future, with governments seeking to extract higher contributions from wealthier professionals to finance development programs and social safety nets.
Reduced Scope of Tax Credits and Allowances
The removal of key tax credits such as those for house financing, health insurance, and investment in financial products signals a policy shift.
Simplification of the Tax Code
One of the government’s stated objectives is simplifying the tax code by removing exemptions and credits. This may continue in the future, leaving only essential credits such as those for pension schemes or charitable donations. While simplification aids compliance, it reduces the ability of individuals to optimize liabilities.
Social and Economic Trade-offs
The withdrawal of credits can undermine policy objectives in housing, healthcare, and financial market participation. Going forward, there may be renewed debate on whether some targeted credits should be reintroduced to encourage socially beneficial behavior while still keeping the tax system efficient.
Growing Role of Advance Taxes
Advance taxes collected on services, utilities, and financial transactions are likely to play a greater role in the future of taxation.
Technology and Wider Collection Points
With the rise of digital payments and e-commerce, governments have more opportunities to collect taxes at the source. This approach reduces evasion and increases the tax base. Salaried individuals may therefore continue to face multiple points of advance tax deduction, which can later be adjusted at the time of filing returns.
Cash Flow Challenges
For salaried individuals, the increasing reliance on advance taxes can create cash flow difficulties. Although these taxes are adjustable, they lock up funds until annual filing, effectively acting as an interest-free loan to the government. This trend is expected to continue unless adjustments are made in the mechanism of refunds and reconciliation.
Technology-Driven Compliance
The future of taxation for salaried individuals will increasingly depend on technology.
Automated Data Matching
With improvements in digital record-keeping, tax authorities can cross-check salaries, banking transactions, utility bills, and property records. This reduces the possibility of underreporting and increases compliance. Salaried individuals, who are already documented, will likely see smoother but stricter enforcement.
Online Filing Platforms
Filing tax returns is expected to become more user-friendly through automated platforms. Salary certificates, deductions, and advance tax records may be pre-populated in return forms, reducing the burden of compliance but eliminating flexibility for errors or omissions.
Rising Burden on Documented Salaried Class
One of the recurring criticisms of Pakistan’s taxation system is the disproportionate burden on the documented salaried class.
Narrow Tax Base
Since many sectors of the economy remain outside the formal tax net, salaried individuals, whose incomes are fully recorded by employers, become the easiest group to tax. Unless the tax base broadens to include traders, agricultural income, and informal sector workers, salaried taxpayers may continue shouldering more than their fair share.
Potential Policy Shifts
Future reforms will likely focus on expanding the tax base rather than solely increasing the burden on salaried workers. This may involve stricter enforcement measures against non-filers and unregistered businesses, but salaried individuals may still remain the most reliable contributors.
Fiscal Pressures and International Commitments
The direction of tax policy for salaried individuals is also shaped by fiscal pressures and international agreements.
IMF and External Financing
Commitments to international lenders such as the IMF often include conditions to increase tax revenue. This can lead to the government adopting stricter measures on personal taxation, including higher rates for high-income earners.
Domestic Revenue Targets
Pakistan faces a constant need to raise revenue to fund defense, debt servicing, and development programs. As long as the informal economy remains untaxed, documented groups such as salaried individuals will remain central to meeting revenue targets.
The Case for Reintroducing Targeted Reliefs
While simplification has been a government priority, there is a strong case for reintroducing targeted reliefs in certain areas.
Housing Incentives
Given the country’s housing shortage, reintroducing a limited tax credit for house financing could stimulate construction activity, create jobs, and help families secure long-term housing.
Healthcare Incentives
Providing tax benefits for health insurance policies could encourage wider adoption of health coverage. This would reduce reliance on public hospitals and improve healthcare outcomes.
Investment Incentives
Encouraging investment in mutual funds, pension schemes, and insurance products through tax benefits would not only provide financial security to individuals but also deepen financial markets.
Comparative Perspective with Other Countries
To understand the potential trajectory of taxation for salaried individuals, it is useful to look at international practices.
Progressive Slabs
Many developed countries maintain highly progressive slabs, with top marginal rates exceeding 40 percent. Pakistan’s top rate of 35 percent is comparatively moderate, suggesting scope for upward adjustments in future reforms.
Tax Credits and Deductions
Countries such as the United States and India provide multiple deductions for mortgage interest, health insurance, retirement savings, and education expenses. The trend in Pakistan has been to move away from such deductions, though global experience suggests they can be effective in promoting social welfare goals.
Compliance Technology
Globally, tax systems are leveraging big data and artificial intelligence for compliance. Pakistan is also moving in this direction, and salaried individuals may soon see even more integrated platforms for filing and reconciliation.
Role of Employers in Future Taxation
Employers play a central role in collecting taxes from salaried individuals through withholding mechanisms.
Enhanced Reporting Requirements
Future regulations may require employers to provide more detailed information on employee benefits, allowances, and reimbursements, ensuring that all taxable benefits are captured.
Employee Awareness Programs
Employers may also take on a role in educating employees about their tax liabilities, advance tax adjustments, and available credits, helping them manage compliance more effectively.
Long-Term Outlook
The long-term outlook for salaried taxation will depend on balancing relief with revenue needs. Some likely trends include:
- Continued progressivity in slabs, with higher rates for top earners
- Limited availability of tax credits, restricted to socially beneficial expenditures
- Increasing reliance on technology-driven compliance and advance tax deductions
- Possible reintroduction of targeted incentives for housing, healthcare, and investments
- Ongoing fiscal pressures requiring salaried individuals to remain key contributors
Conclusion
The evolving tax landscape for salaried individuals reflects the government’s broader objective of balancing fiscal needs with social equity. Through the Finance Act 2022, the rationalization of tax slabs provided relief for lower- and middle-income earners, while higher rates were applied to top earners to strengthen progressivity. However, the withdrawal of multiple tax credits and allowances has reduced the avenues for individuals to manage their liabilities, effectively simplifying the system but also limiting flexibility.
Salaried individuals continue to bear a disproportionate share of the tax burden due to the narrow tax base and persistent challenges in documenting other sectors of the economy. Advance taxes, collected across multiple transactions, further increase the effective load on this group, even if they are adjustable. At the same time, technology-driven compliance mechanisms are reshaping how taxes are calculated, collected, and monitored, making salaried income one of the most transparent and enforceable sources of government revenue.
Looking forward, the future of salaried taxation will be shaped by inflationary pressures, fiscal demands, and international commitments. While progressivity in slabs is likely to deepen, the government may need to reintroduce targeted reliefs in areas like housing, healthcare, and retirement savings to encourage social welfare goals and financial security for individuals. Expanding the tax base to include informal sectors remains crucial to reducing the reliance on salaried individuals as the most documented contributors.
In essence, the taxation framework for salaried individuals is in transition. Relief has been provided at the lower end, but higher earners face heavier contributions, and the removal of credits has shifted the balance toward a stricter, compliance-driven regime. The challenge ahead lies in ensuring that while revenue needs are met, the salaried class is not overburdened, and taxation continues to serve as a tool for fairness, growth, and long-term stability.